FASB Taps Suggestion Box—Issues ASU for Measurement Period Adjustments

measurement period adjustmentsMark your fiscal calendars!  A new Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) goes into effect for fiscal years beginning after December 15, 2015, for some business entities.  ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments seeks to simplify the accounting for business combinations by eliminating the requirement to retrospectively account for adjustments in provisional amounts during the measurement period.

According to accounting principles generally accepted in the United States (GAAP), if the initial accounting for a business combination is incomplete by the end of a reporting period, then the acquiring entity must report in its financial statements provisional amounts for the incomplete items.  Existing GAAP standards then require an entity to retrospectively adjust these provisional amounts during the measurement period with a corresponding increase or decrease to goodwill.  The measurement period (not to exceed one year from the acquisition date) is the period after the acquisition that lasts until the entity receives the information it needs about facts and circumstances that existed at the acquisition date that, if known at the time, would have affected the amounts initially recognized or resulted in the recognition of additional assets or liabilities.  The acquiring entity also must retrospectively revise comparative information for prior periods presented in financial statements to reflect the income effects as a result of the changes made to provisional amounts.  This is where the new ASU comes in—eliminating the requirement to retrospectively account for adjustments in provisional amounts during the measurement period.

The revised standard will require that the acquiring entity account for adjustments in provisional amounts due to a business combination in the reporting period in which the adjustment is identified.  These adjustments include changes in depreciation, amortization, or other income effects.  The amounts for provisional adjustments should be calculated as if the accounting were being done at the acquisition date.  As a result of this ASU, such adjustments may be reported in the fiscal year after an acquisition, if appropriate.  The adjustments should either present separately on the face of the income statement or be disclosed in the notes, by line item, the amounts that would have been recorded in previous reporting periods if the information were available sooner.

FASB issued this ASU as part of its Simplification Initiative, a program launched in 2014 that seeks to maintain the usefulness of information reported to investors while reducing the cost and complexity in financial reporting.  Many of the updates that have been issued as a result of the Simplification Initiative, including ASU 2015-16, were initially suggestions submitted by FASB stakeholders.

This ASU is effective for public business entities for fiscal years beginning after December 15, 2015, as well as interim periods within those years.  The ASU is effective for all other entities for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017.  The amendments in the ASU should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU.  Earlier application is permitted for financial statements that have not been issued.

If you would like more information about measurement period adjustments and how this standard could affect your business, contact the expert listed below at PYA, (800) 270-9629.

Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

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